Today’s businesses face a range of financial challenges that can threaten their stability and long-term viability. This is especially true given the current uncertain economic times we operate in and amid the ongoing volatility in the geopolitical landscape.
Successfully navigating financial challenges requires strategic planning, proactive management and timely intervention. This article examines restructuring options for businesses facing financial difficulties and highlights how professional advisers can provide essential support.
Accountants can help to assess the viability of the business at an early stage
Early intervention
Business owners can sometimes be reluctant to face facts about future viability, sometimes because they lack the necessary expertise to assess the full impact of financial forecasts, or alternatively because they feel that circumstances may change in their favour. For example, the management of companies that experience a seasonal boost – as an example, from Christmas sales – may hope that this will be sufficient to address current difficulties.
The accountant's role
Accountants who act as restructuring experts support businesses in a number of key ways:
- Assessment and diagnosis: assessments determine the financial health of the business and identify the root causes of distress. Diagnosis is crucial in developing an effective restructuring plan.
- Strategic planning: accountants can help formulate strategic restructuring plans that address immediate financial concerns and set the stage for long-term recovery. This includes cashflow management, cost reduction strategies and debt restructuring.
- SCARP and examinership: when required, accountants can act as process adviser or examiner to a company and guide businesses through these legal restructuring frameworks, ensuring compliance and ultimately exiting the business from the process on a stable footing for the future.
- Creditor negotiations: accountants can assist with and facilitate negotiations, helping develop mutually beneficial solutions with creditors.
- Investment sourcing: given that cashflow is the lifeblood of every business, accountants who act as corporate restructuring experts can also assist businesses in identifying and securing new investment and/or partners to provide the necessary capital to support restructuring efforts, to include the negotiation of appropriate and enduring terms.
Restructuring options
Several restructuring options are available, each with unique advantages and considerations, and include the following:
- Small Companies Administrative Rescue Process (SCARP) designed for SMEs. The SCARP offers viable businesses a streamlined alternative to traditional examinership with less complexity and expense, and substantially less engagement with the courts. A SCARP enables companies to negotiate with creditors, restructure debts and develop a viable plan to continue operations. At BDO we have successfully undertaken a number of SCARP assignments for distressed businesses and stress the importance of engaging early.
- Examinership. This is a legal process offering 70 days (extendable to 100 days with court approval) of court protection from creditors while the distressed company formulates a rescue plan. Examinership provides breathing space for businesses to restructure their debts and implement a recovery strategy under the supervision of a court-appointed examiner. While it is a well-established restructuring mechanism, expert guidance is essential to meet legal requirements and achieve the best outcome.
- Informal arrangements. In some cases, informal arrangements with creditors can be an effective way to address financial difficulties. These involve negotiating directly with creditors to reach mutually beneficial agreements, such as extended payment terms or reduced debt obligations. Retention of a professional adviser can bring rigour to this process and also provide confidence to counterparts that the proposals have the input of experienced restructuring advisers.
- New investment. Also referred to as distressed M&A, this involves bringing in new partners, loans or equity, which can provide the capital needed to stabilise and restructure a business. Accountants have a role in identifying and negotiating with investors. The restructuring adviser should be able to assist company management in the negotiation of new capital into the company, and/or sale of the business or part thereof if appropriate.
However, if the business is not viable, liquidation may be the most appropriate route. Liquidation facilitates an orderly wind-down of operations and fair distribution of assets to creditors.
Directors have a heightened duty to creditors and employees
Transparency
During times of financial difficulty, directors have a heightened duty to creditors and employees. Transparency and fair treatment are paramount, as these stakeholders rely on the company’s leadership to navigate through the crisis responsibly. Directors must ensure that all decisions are made in the best interests of the company while having regard to the interests of creditors and employees, and considering the potential impact on them. Experienced restructuring advisers can assist directors in determining the most appropriate next steps and thereby ensuring that they are adhering to their duties as a director.
In summary, there are established restructuring options available to help viable businesses who have got into financial difficulty, as this article outlines. That some companies fail to take advantage of the most appropriate option for them is often down to a lack of understanding of how to proceed.
It is therefore important for business owners to be clear that by acting early and procuring the expertise of an experienced restructuring adviser they can realise the best outcomes for the company, staff and suppliers alike.
